Namsys Inc

Growing Nanocap in a dying industry?

Disclaimer: This is not investment advice. The author at the time of writing owns shares in Namsys, Inc. His views may be biased and he may buy or sell shares at any time without further notification. The article covers a risky and illiquid nano-cap stock. Please do not rely on the information provided herein and always do your owns research.

In recent weeks, I have enjoyed reading pitches from other investors. It is great the community of bloggers and substackers has been growing and there is really great stuff to be found out there, including a lot of for-free posts, largely on micro and nano caps. After a while, it is now time to write again, give back an idea and see if it generates any interest.

I have followed Namsys (Ticker CTZ in Canada) for a while and also do own shares in PA. Namsys has been written up in the VIC here and here but the last post dates from 2021 and some things have changed since then. In 2019, Tristan at Hurdle Rate wrote up the company. In my view, the share price might be inflecting based on improved numbers even though it is trading close to the 2021 levels. It is also an interesting case of a company serving a sector many consider to be dying (cash storage and delivery) with one of the investing world’s most preferred business models (Sofware-as-a-Service, SAAS).

Background and Business Description:

Founded in 1989, Namsys is a provider of cloud-based sector-specific software solutions for cash management and logistics. The company has two software platforms, Cirreon and Currency Controller. It is based in Toronto, Canada, and has a total of 17 employees.

Cirreon Cirreon is a software-as-a-service (SaaS) platform that manages smart safe networks, Cash-in-Transit operations, deposit tracking and online change orders. Currency Controller offers software for Cash Vault Management. Essentially, the software aims to connect various aspects of the (physical) cash management cycle of companies. A good overview of the product features can be seen in this company video:

Among the Namsys’ clients are companies like Davis Bancorp or Burroughs .

Competition

The second VIC write-up, now public provides another good overview of the products of Namsys as well as relevant competitors (as of 2021):

As can be seen above, Namsys is competing in its various segments with much larger companies such as FiServ for Cirreon/SmartSafe, Descartes for Cash-In-Transit and Giesecke & Devrient for Currency Controller. These companies are larger than Namsys and have significantly greater resources to compete. At the same time, none of them overlaps 100% with Namsys. Moreover, once a software has been implemented, there is clear a switching cost associated. Therefore, if any of these companies really wanted Namsys to go away, to could be easier to acquire them rather than outcompete them. At this point though, Namsys with revenues of 7m CAD is probably not much of a concern.

Revenue Breakdown

Here is a revenue split over time by product:

Namsys was formerly known as Cencotech but the core products of the company, Cirreon and Currency Controller, have been in place for at least 15 years, growing steadily from a tiny base. To my understanding, the company’s revenue growth has been driven by (1) winning new customers in the core market USA, (2) developping and selling new add-on modules to its existing software platforms and (3) expanding internationally into countries like Mexico:

The company has also started to operate in the UK.

Terminal Risk

The handling and transport of cash may be perceived to be a dying business by some and it is true that payments are getting more digital. So is there a terminal risk for a company like Namsys? In my view, there is not. Recent data shows that while the use of cash in the US has retreated since 2016, it an average American still performs 7 cash transactions per month.

Cash is overrepresented for small-amount purchases and among elderly and lower-income population. According to the latest data I could find, there are more than 500,000 ATMs in the US. All of this points to cash being around for some time in the US. Just because an affluent youngish finance substack community hardly uses cash themselves these days does not mean it will disappear tomorrow. In most emerging countries, my thesis is that cash will retreat even more slowly. For example, in Mexico, about 60% of transactions are cash-based versus 16% in the US. Finally, considering how long of a tail supposedly “dead” and “harmful” business like coal or tobacco have been enjoying (and still are) enjoying.

Management / Incentives:

Two key people at Namsys are Kenneth Barry Sparks and Jason Siemens. Sparks is Executive Chairman and owner of about 9m of the shares or 34% of the total share capital. While I could not verify his age, my guess is that he is in his seventies. His background is in corporate finance where he started his career at the Royal Bank of Canada. He is the PResident of Torvan Capital Group and has served on various boards in Canada, including at Dundee Corp. Sparks has been on the Namsys board since 1997, right after the company went public. Sparks is earning a base salary of 60K CAD per year, so he is certainly more interested in driving the company value than in milking it for salary.

Jason Siemens to my knowledge is the son of the company’s co-founder. He started at the company as a programmer and worked in operations prior to becoming COO and later CEO. Siemens has been on the board since 2017. He owns about 700K Namsys shares, roughly 2.6% of the company. In recent years, his total salary has been about 500K CAD, of which 290K base salary.

In summary, we have a seasoned and experienced management in place with decent ownership of shares. I would like to know more about them, in particular see them present their results and initiate proper IR work. So far, there is an annual event around the annual meeting for which they prepare a call and a presentation. However, engaging in IR activities has so far not been a priority, which may be undertandable given the small team. I still think it would be good to implement this as the company grows.

Financials:

Here is an overview of how key financial data, largely the income statement has evolved since 2015 (data from TIKR):

1. Revenues have increased by roughly 4x since 2015.

• In terms of margins, it seems like something happened in 2020 with Gross Margins down big time in that year (and fairly stable since) and and extraordinary SG&A number hitting the P&L. The reason is that in 2015, the company passed a Employee Long Term Bonus Plan to pay 15% of the company value to certain employees in case of a company sale/change of control. In 2020 with no change of control on the horizon, the board took the decision to “buy back” the plan, i.e. terminate it and pay out its value of about 3.9m CAD (close to 15% of the equity value at the time) to the employees. Note that during this period, there were no options or other form of stock-based compensation. My opinion is that setting up a plan like this is somewhat amateurish/non-standard as the event-linked payout is ill-suited for the purpose of motivating employees. I think that terminating the plan and paying out its implied value is an act of cleaning up a bad structure. Note that a portion of the price was captured as COGS, harming the gross margin while the larger chunk was captured in SG&A. After the buyback, a stock option plan was implented and the cost is being recognized as COGS, explaining the ongoing lower level of Gross Margins, even though it a recently improved a bit.

• Over the last three years, the positive effects of some operating leverage have become visible with operating margins ticking up to about 37% (SAAS is such a nice business…)

• As of 31 July the company had 7.4m CAD in Cash and ST investments and no financial debt. Total assets stand at 8.7m CAD, i.e. the company needs very little capital to operate. CAPEX has been close to zero as software development costs have been expensed.The cash pile has grown steadily, save for the Bonus Payout in 2021:

• Per the end of June, Namsys had 1m in total liabilities, 600K of which was deferred revenue and no financial debt. Deferred Revenue is my favourite liability position as it is a backlog of future revenue with the cash already received. For Namsys, this position is cyclical due to the nature of the contracts and always the greatest in Q1, then declining over the year. We can however observe that we are reaching a higher level than in previous years and growth has also accelerated a bit:

Capital Allocation:

The overall growth in the company’s cash pile over recent years is evidence that Namsys generates cash at a healthy clip has barely any capex needs. In the past, the company has used cash to (1) pay down all its financial debt which they achieved around 2014, (2) buy back all the outstanding preference until 2016 and (3) buy out the LT Bonus Plan as discussed above. Still, cash has piled up.

In their rare statements, Namsys management reiterates that they are open for acquisitions if the come at the right terms. Here is a Jason Siemens statement transcript from the last annual meeting:

So an acquisition is possible they have looked at it for a number of years. However, they have never done anything.

What has changed and in my view could improve the story is the return of capital to shareholders. In May, a special dividend of about 1.35m CAD was announced.

Note that this special dividend was explained with the “strong financial performance” which has only strengthened since then. Moreover, Namsys in August 2023 announced a share buyback program via a Normal Course Issuer Bid (NCIB) and has over the past year repurchased 1.5% of its own shares. Given there has been a dilutive effect from stock options, the number of outstanding shares has barely dropped on a diluted basis. Also, the shares are illiquid and it is not simple to buy back a big chunk. But: It is evidence and comforting to know that management are actively looking at ways to return capital to shareholders. Given the company is in a net cash position and cash generation may even pick up from here, I think it is very possible that we might see the instatement of a regular dividend or potentially a tender /Substantial Issuer Bid (SIB).

Valuation:

Namsys has generated a net income of 1.6m in FY 2023, 2.0m in the last 12 months and 0.58m in the last quarter. If we annualize the last quarter which I find fair given there is no seasonality and add in just a little growth, we might look at 2.5m Net Income for FY 2025. This is a 12-13x PE multiple 2025 on the current market cap of 32m CAD (share price of 1.18 as of this writing), not adjusted for cash. On an EV/EBIT basis, the multiple looks lower, we are looking at a 10x multiple based on actual L12M numbers. These number by itself do look higher than for most of my investments, however we are looking at a fairly stable software business with high margins, no seasonality, almost no investment needs and some growth. At the same time, these multiples are not insanely high. So if we can grow revenues by 10-12% and operating income by 15-20% for a few years, as we have seen over the past two years and much of the 2010s, the multiple could come down fairly quickly. What I find encouraging is that growth has recently picked up again and the large deferred revenue backlog makes me conclude this could continue. While still very small, the company is reaching a size where are double-digit growth rate has some impact on absolute numbers.

I think that businesses such as Namsys are attractive acqusition candidates for larger players in the sector such as Fiserv or G&D but also for software conglomerates such as CSU and its smaller peers. This will depend on the willingness to sell of the largest shareholder, Mr. Sparks without whose endorsement it would be difficult to collect a majority.

Summary:

Here are some pros and cons of the Namsys thesis

+ Established software (SAAS) business with 99% recurring revenues and a history of growth

+ Steady high profit margins, little capital need, established customer base who likely experience switching cost

+Capital allocation has improved towards remuneration for shareholders, management seems more aligned than in the past

+/- Valuation not cheap on actual numbers, however reasonable if some growth is expected.

-Small company which might be attacked by larger players (if they really want to)

-Cash Transport/Logistics might be a challenged industry

From my perspective, this is an attractive risk/reward profile which is why I own some shares.